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Dear CitiBank: What the heck is an “interest rate rebate?”

Yesterday, Sen. Carl Levin (D-Mich) fired off a letter to the Federal Reserve Board urging it to tweak the rules implementing the CARD Act. Among them, Levin took time to identify a litany of wily credit card tricks. He devotes quite a lot of space to something he calls “Interest Rate Rebates” and it refers to the recent CitiBank “Earn Back Interest” program. Here’s how he describes it (my emphasis and asides):

At least one credit card issuer [cough, Citi] has unilaterally changed the interest rates of existing customers by increasing the rate substantially, to as high as 29.99 percent, and promising a substantial rebate if they exceed a specified spending threshold each month and make on-time payments of at least the minimum balance. The Subcommittee is aware of one case in which this spending threshold was set at $1,500 per month and the promised “rebate” would allow the consumer to “earn back” a credit equal to “10% of the total interest charge on purchase balances.”

Levin goes on to note that the practice is “potentially unfair and abusive” on account of its pretty vague wording and spells out a couple scenarios where this could go wrong for the consumer, for example:

Banks could reduce the rebate at the last moment

Citi could bump up the threshold at the last moment

Rebate payment could be structured to “CARD Act’s prohibitions against double cycle billing and charging interest for debt paid on time.”

Sounds pretty slippery, huh? If you’re a Citi customer, you’ve probably read all about it already when your interest rate was raised. But for the rest of us, here’s how the Earn Back Interest or Interest Rate Rebates work:

According to reports from a FatWallet forumgoer, Citi notified him on November 13, 2009 that they would be raising his interest rate to 19.99%. However, if he charged $500 or more each month and made his payment on time, he would receive an interest rebate equal to 10% of the total interest charge which would, theoretically “help [him] offset the increase in [his] purchase APR.” But would it?

Let’s crunch some numbers.

Let’s say he’s carrying a $8,000 in debt, which is the average amount of credit card debt per household at the end of 2008 (Nilson Report April 2009).

In an effort to get that sweet, sweet rebate, he charges $500 more to bring him to $8,500 at the end of the month.

That’s a total of $141.60 in interest fees.

So, whenever Citi feels like it, they’ll send him his 10% of $141.60 which is $14.16 in savings for spending $500.

Talk about a consolation prize.

That’s a conservative scenario, too, since other reports indicate that Citi users have thresholds up to $1,000. As another FatWallet forumgoer aptly replied to the original thread:

“How is this different than spending $1 so that you get a $0.1 tax break?”

It’s not really.

It appears to be nothing but a strategy for Citi to rack up more interchange fees (about 2% of each transaction swiped) from merchants by offering cardholders a false carrot. I’m sure there was some kind of board meeting where the execs were brainstorming.

Citi BigWig: “How can we raise $1.84 billion from our 92 million customers?!”

Citi SmallWig: “Uhh, jack up interest rates?”

Citi BigWig: “Stupid idea! We need some way to sneak around that confounded CARD Act!”

Citi BigWig: “Wait, are you thinking what I’m thinking? 2% of $1,000 times 92 million is…”

Citi MediumWig: “That’s right – $1.84 billion in profit!”

Citi BigWig: “That’s genius, Mr. MediumWig! I’m promoting you!”

Citi (Slightly)BiggerWig: “Yes!”

Now, of course, not everyone’s going to fall for this hook, line and sinker and rush out to spend, spend, spend just to get that not-so juicy reward. Frankly, most of us can’t afford to. Which shines a light on the added dubiousness of the whole idea of interest rate rebates: those that can afford to break the $500 to $1,000 spending threshold probably won’t be as crippled by the higher interest rates than those who are trying to dig their way out of credit card debt little by little.

Here’s an idea for an alternative to the interest rate rebate – it’s an amazing plan that can erase 100% of your interest charges if you meet a certain spending threshold. It’s easy – all you have to do is pay off 100% of your credit card balance by the end of the month and then you’ll pay 0% interest, no matter what your credit card terms are.

2 thoughts on “Dear CitiBank: What the heck is an “interest rate rebate?””

I can only imagine how big a pain in the ass it must be trying to regulate financial industries of any sort. Anytime you close that they use to siphon money from consumers, they find some other way to do it. And they happen to have smart number crunchers to help them along the way.

Edwin you are totally right – the speed of profiteering innovation moves so much faster than the speed of legislation.

It almost seems like a lost cause. I don’t want to sound too feathery and new age, but I feel like what we need is a massive attitude change – either in the way that businesses feel about their customers or in the way that consumers feel about being consumers.